Mondelez International Inc. (MDLZ, Financial) is the new name for former Kraft Foods Inc.`s global snack business, after the spin-off of Kraft’s North American grocery business into the independent company Kraft Foods Group Inc. (KFRT, Financial) in October 2012.
The firm is a leading player in the manufacturing and marketing of global snack foods and beverages. Its product categories include biscuits, chocolate, gum and candy, beverages, and cheese & grocery. Its wide brand portfolio includes nine trademarks, which generate revenues of over 1 billion each, and have thus been christened “power brands”. They represent 60% of Mondelez’s total revenues and grow at rates higher than the company’s.
Mondelez has manufacturing units in more than 80 nations and markets its products in 165 countries
Hard Times After Split
Despite being an industry giant, the company has been showcasing disappointing top-line results since it split from Kraft Foods in 2012.
For one, there has been a global slowdown in category growth affecting the firm, which has seen its categories grow less than 4% in 2013 compared to 6% in 2012. Secondly, power brand sales in China fell by 5.6% in the fourth quarter, mainly due to excess Oreo biscuit inventory but also to an economic slowdown which is affecting consumption in general. Lower coffee prices over the last year, which haven’t yet stabilized, are also hurting Mondelez’s revenues. And, last but not least, there has also been a significant downturn in its gum business, which declined by 16% year- to- date through the third quarter of 2013.
Global Headwinds
Given that only 20% of Mondelez’s revenues are generated in the U.S. and around 40% comes from emerging markets, the firm is broadly exposed to economic, political, and regulatory risks in these regions. In fact, persistent economic weakness is debilitating consumption, thus affecting business in countries like Brazil, Venezuela, and Argentina. Moreover, volatile currency fluctuations around the globe are also hurting the firm’s margins significantly. And, higher foreign exchange transaction costs on imported commodities reflect on increasing raw material costs which are likely to persist.
Cost Savings and Improved Productivity
In face of the aforementioned challenges, Mondelez seeks to grow its operating margins from 12% in fiscal 2013 to 14-16% by 2016. To this aim, the firm has implemented a zero-based budgeting system in which, not only the cost variance, but every line item of the budget needs to be approved by department managers.
On the other hand, and most importantly, Mondelez is building an integrated supply chain organization and restructuring the supply chain network. In addition, it is driving productivity improvements through Line Six Sigma and it has lowered its global facilities headcount by more than 3000.
Resulting from these efforts, Mondelez expects to achieve $3 billion in gross productivity savings, $1.5 billion in net productivity and $1 billion in incremental cash over the next three years. Thus, the firm’s target is to expand operating margins by 500bps in North America and 250 bps in Europe, from 2012 levels, by 2016. Margin improvements will be reinvested to empower growth in emerging markets.
Hard Work Ahead
Mondelez has a wide economic moat and attractive growth plans. However, recovery will take hard work and will only be visible in the long- term. Mondelez`s stocks trade at 22.60 its trailing earnings, a slight premium compared to its peers’ average of 19.30 while its earnings per share growth rate reported a disappointing -5.90, compared to 3.20 of the industry median. Investment guru George Soros (Trades, Portfolio) recently reduced his holdings by 24.05% following my feeling that Mondelez isn’t an attractive investment opportunity for the time being.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
